Ricky Kirpalani, Lead Sponsor -; Investment Advisor, First Water Capital Fund (AIF)

21 Mar 2022 , 11:03 AM

In an interaction with Mamta Maity, indiainfoline.com, Ricky Kirpalani, Lead Sponsor & Investment Advisor, First Water Capital said "until September 2018, I was primarily managing a private pool of capital. But it was always my intention to institutionalise my methodology and develop a team that was capable of taking forward my investment philosophy/thesis.

Why the name First Water Capital?

Well, the term First Water was used a long time ago by diamond merchants who would test a diamond’s quality by dropping the stone into water. The purest and most translucent stones were called diamonds of the First Water. It metaphorically epitomizes our endeavour in the arcane world of finance.

What would you say is your approach and how have you evolved over the years?

Whilst I have been a passionate investor for close to three decades, developing and refining a robust investment philosophy was an evolution and not a toggle switch. To be a good investor, one needs to learn both the art and the craft of navigating the market. The craft comes through the quantitative and qualitative aspects of sector/stock picking, but the art is developed through time, experience, and interfacing with the markets. This is what enables us to opportunize on drawdowns, optimize on run-ups, and remain stoic when everyone else is panicking.

The essence of my philosophy is finding a combination of value and growth plays. It is one thing to find a company whose intrinsic value is significantly greater than what the market is pricing it at, but it’s even better if there is a strong element of growth, often times structural vis a vis cyclical as perceived by the market.

One has to exercise a high degree of patience and fortitude. As the adage goes, in the short run, the market is a voting machine and in the long haul, it is weighing machine. In the near term, it will test your conviction to an extent that self doubt can creep in. However, over the medium to long term, if one is right and has the courage of his conviction to go the distance, then that is where he can potentially be rewarded in spades.

I also tend to have a concentrated portfolio. Selecting 30-40 stocks may help diversify your risk, but it is less likely to give you alpha, because how do you truly differ from the index if you have generally bought the index? A similar risk mitigation could be achieved with 15 -18 stocks as well. By having a more concentrated portfolio, not only am I better able to monitor the fundamentals of the companies I hold, but if one stock outperforms, it contributes more to the alpha creation. Of course, if it doesn’t, then the flip side is true. So, it’s a double-edged sword.

Tell us about the journey of First Water Capital

Until September 2018, I was primarily managing a private pool of capital. But it was always my intention to institutionalise my methodology and develop a team that was capable of taking forward my investment philosophy/thesis.
Although we started during a broad market down cycle, it allowed us to average into stocks at relatively decent prices. Of course, along came the pandemic in 2020, which initially caused a sharp decline, but also subsequently, a sharp rise in asset prices, from which we have benefited.

Has the pandemic affected the growth of your business and how?

Growth can be seen in two ways. One is performance and the other is AUM growth. The pandemic has been a major booster to performance, due to the measures that were taken by various governments around the world, be it injecting liquidity into the economy or increasing spending on infra. These measures have led to sharp increases in asset prices across the board.

Of course, in the light of increasing inflation, there are now signals from governments, especially the US, to start tapering. But this is par for the course, and we need to take it in our stride. We are long-term investors, so while there may be an impact on prices due to rebalancing of funds, we very much keep our eye on the intrinsic value of our companies, which even now, we believe still hold good absolute and relative value.

Growing AUM is also a key part of building a fund. Of course there are challenges with limited travel, fewer networking events etc., but we have managed to continue building our book through existing and new clients. We believe 2022, geo-politics and Black Swans aside, would be a year for consolidation even as allocators look to new, exciting managers and themes.

What is your outlook on the financial industry?

Well, we believe that in India at least, the outlook is strong. To hone it down to the asset management industry, penetration levels in India are still relatively low, but this should improve as incomes grow and people are able to save more and look to make their money work for them.

There are a number of factors that should encourage people to redeploy funds away from hard assets such as gold and real estate and into stocks, such as:

1. A generational shift in awareness toward equity being an asset class of choice, especially triggered by the rush of millennial investors during the Pandemic
2. Digitization;
3. Better regulation; and
4. Low savings rates.

We believe that India is at the beginning of its economic Golden Decade and picking good sectors/companies will be a way to be a part of its wealth creation. We are also hopeful that the Government will continue to recognize the importance of the markets in providing capital to the building blocks of the nation.